LLC and Sole Proprietorship. Starting up any new business encompasses many things and choosing the right business structure is definitely one of them. If you are an entrepreneur who is just starting out a business, and you are contemplating between the two most popular business structures which are the sole proprietorships and limited liability companies (LLCs) which one of them to structure your business as that is why this article is written to guide you.
Both business structures have both their advantages and disadvantages. While the benefits of sole proprietorship revolve around their simplicity and low cost, the benefit of LLCs on the other hand revolves around their flexibility, including method of taxation and their liability protections for owners.
Difference Between LLC and Sole Proprietorship
For further clarification, before choosing any of this business structure, you should evaluate the strengths and weaknesses of each as regards to your needs. Here we bring you the principal features of the two structures:
Limited Liability Companies
- LLCs provide limited liability coverage for their owners
- LLCs are to register with the state and pay registration or filing fees.
- There are annual fees that limited liability companies must pay to maintain registration.
- Limited liability companies are subject to state laws governing LLCs.
- It is expected that LLCs must keep records and funds separate from their own.
- LLCs can be taxed as sole proprietorships, partnerships, or even corporations.
- Also, Sole Proprietorships are generally less expensive than LLCs.
- Lastly, Sole Proprietorships are taxed as a self-employed person.
Now that we know the differences and similarities between. LLCs and sole proprietorships, it is also very important that we. Understand the concepts and definitions determining these differences.
LLC means a Limited liability company. This implies that limited liability is one of the cardinal benefits of an LLC over a sole proprietorship. In LLC, it is the LLC that is responsible for the business’s debts. And liabilities. This means that in most cases, limited liability company members are. Protected from their creditor’s have of the LLC and also from any lawsuits. Which arise against the LLC. In a sole proprietorship, the owner is responsible. For the debts and liabilities of the business.
Start-Up and Maintenance Costs
Apart from the fees for obtaining any required licenses or. Permits, setting up a sole proprietorship basically does not involve very many other costs, while LLCs, on the other hand, will have to register with the state, and pay initial registration or filing fees, and there are also other fees like annual fees, which have to be paid in order to maintain their registration as an LLC in good standing.
LLCs are subject to laws that govern LLCs. Depending on the state in which an LLC is registered, these laws may require you to have an operating agreement for your LLC, or a registered agent. Most times, the regulations will require additional paperwork, like annual information statements or reports, which have to be filed in a timely fashion. While proprietorships, on the other hand, are not subject to similar regulations.
State regulations governing LLCs, include required words that an LLC must incorporate in its name. For instance, “LLC” or “Limited Liability Company” may be required at the end of an LLCs name. Sole Proprietors on the other hand do not face such requirements and generally need only to ensure they are not using a name that’s being already used by another business operating within the same state.
Separation of Business from Personal
As a sole proprietor, you don’t need to bother about intermingling your business funds with your personal funds because as far as the law is concerned, there are one and the same. If you are running an LLC, you must be careful to keep both LLC records and funds separate from your own personal records and funds. If an LLC intermingles it’s personal funds with LLC funds, it can result in the forfeiture of the protection of the limited liability.
LLC Taxes Vs. Sole Proprietorship Taxes
When it comes to taxes, if you operate your business as a sole proprietor, you will be taxed as a self-employed person and the income of your business is considered your personal income for tax purposes. However, an LLC can be taxed as a sole proprietorship, a partnership, or a corporation. An LLC may make an election to be taxed as a corporation, when such an election is not made, it is taxed as either a sole proprietorship or a partnership, based on the number of members it has.
Here you have both the advantages, disadvantages, similarities, and differences of both the sole proprietorships and the limited liability companies, it’s now left for you to make decisions, depending on the peculiar needs of your business.